Income Sources, Needs and Wants in Retirement

Some time ago on this site I wrote one of the biggest retirement questions and potentially one of the most frequently asked retirement questions is “How much is enough”?

The answer to this question is usually: it depends. It largely depends on what you’ll spend in retirement.

I was thinking about that subject recently including some needs and wants, and forecasting where (I hope) some our retirement income will come from. Here is what crossed my mind in today’s dollars:

Needs per month – Home ($1400)

Home maintenance ($300 per month)

Property taxes ($350 per month)

Home (core) utilities (heat, hydro, water) ($325 per month)

Home insurance ($125 per month)

Internet ($100 per month)

Cell phones ($100 per month)

Contingency/buffer (TV?) ($100 per month)

Needs per month – Personal ($1600)

Food/groceries ($600 per month)

Healthcare ($200 per month)

Household supplies ($200 per month)

Clothing ($200 per month)

Contingency/buffer ($400 per month to cover various entertainment)

Needs per month – Auto ($600)*

Car insurance x2 vehicles? ($200 per month)

Car maintenance x2 vehicles? ($100 per month)

Gas (max $200 per month) x2 vehicles?

Contingency/buffer/saving for a newer car every 10 years ($100 per month)

*Depending upon where we live, in the city or outside the downtown core, do we really need two cars? Probably not. We could likely go down to spending $300 or so per month with one car.

Needs per month – General Savings Fund ($400-$600 per month)

Wants – Travel and Major Entertainment $X?

In today’s dollars, assuming there is no mortgage, no more RRSP contributions, we self-insure and there are no major variations in our fixed expenses I figure general retirement spending could be around $4,000-$4,200 per month after taxes in today’s dollars. I’m sure we can retire on less but this is just an estimate. I’ve got a number of contingencies listed above as well.

The wildcard in our retirement planning comes from mainly wants.

Depending upon our health and desire to travel more money will be needed to retire on. Where will our retirement income come from to blend our needs and wants?

Source # 1 – Pensions

When I started my job with my current employer almost 14 years ago I was offered a choice for my pension plan – defined contribution (DC) or defined benefit (DB). I chose DB. When my wife started her job she was offered the same choice and chose the DC plan instead (based on advice from her Investors Group Financial Advisor before I knew her. Yes, this is a true story). Our hope is that pension income will fund a good portion of retirement expenditures. I am hopeful our pensions will provide us with about $20,000 per year (each) starting at age 55 or 60.

Source # 2 – Registered Retirement Savings Plans (RRSPs)

Ever since I read David Chilton’s The Wealthy Barber it reinforced the lesson of pay yourself first. In my 20s the RRSP contributions were rather lean but I made up for some lost time in my 30s. Later this year I hope my RRSP will be fully maxed out. We hope to contribute more money to my wife’s RRSP in the years ahead.

I figure we’ll need a nest egg of >$500,000 inside our RRSPs (combined) to help fund our retirement (remember a modest portion of this money is really a government loan). So, conservatively taking $300,000 as our own capital, I figure that should yield about $12,000 per year in passive income without any aggressive drawdown of capital. This money will supplement any pension income to cover fixed expenses.

Source # 3 – Non-Registered and TFSA Dividend Income

Investing in stocks that continually pay dividends is a good thing. Investing in stocks that continually increase their dividends year after year is a great thing. Not only does this provide investors with a steady passive income stream but also an increasing passive income stream. We’ve been on a journey to earn tax-efficient (non-registered) and tax-free (TFSA) dividend income for retirement, a goal of $30,000 per year I’ve been blogging about for almost five years now. We have a considerable distance to go to achieve that goal but things are coming along every month. If the pension income and RRSP savings can cover the bulk of our “needs” then this income source could cover everything else including the “wants”.

Source # 4 – Government Programs

Based on Service Canada information, the average Canada Pension Plan (CPP) payment is just over $600 per month for new beneficiaries at age 65. My wife and I will need to wait close to 30 years to collect Old Age Security (OAS) and that only provides a few hundred bucks per month – hardly enough to live from. I’ve left these programs for the end, purposely, since I’m not betting on anything from our government. Any income from government programs will be considered icing-on-the-retirement-cake. We figure very conservatively CPP will pay us about $10,000 per year (combined) at age 60 and OAS will pay us another $10,000 per year (combined) age 65.

Summary

When I add up our pensions starting around age 55 or 60 ($40,000 per year), RRSP income/drawdown ($12,000 per year), non-registered and tax-free dividend income ($30,000 per year), and government benefits (up to $20,000 per year), the sum of these parts should mean we’ll be in decent financial shape in another 15-20 years. We just need to keep doing what we are doing.

That said our retirement plan includes a host of assumptions, hopes and savings goals. Lots of things need to converge in the coming years to keep the plan intact. I figured we needed to start somewhere with our plan to end up remotely close to where we want to be.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $600,000 now - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Subscribe and join the journey!

Good catch with the gas, I’ve updated the post to include $200 per month for gas.

As for the new car purchases, our goal, although this was not stated, was to buy nearly used cars as we get older, and keep them for >10 years. I have a car that is now 15-years-old. I plan to keep that for another couple of years.

I’m surprised yearly ownership costs are that high by the CAA study. There is no way we spend $19,000 per year on two cars – thank goodness 🙂

Yes, possibly, if we buy two cars. We’re thinking we’ll only need one car 10-15 years out from now. I think I put question marks in the post for the two cars. Like any plan, there are always question marks I think but I’m a firm believer in the process of planning and re-planning. No doubt that’s a subject I’ll write about at some point.

Even if you drop down to one car, you still have to buy it, and that’s about $100 per month.

I’ve based my “enough” number on my family’s current spending with extra added to cover very infrequent things like replacing cars, rooves, furnaces, and windows. I have this figure coded into a spreadsheet (computing its increase with inflation) and I match it to the income I could safely derive from my savings (plus CPP and OAS after I turn 65). I haven’t written about the detailed figures on my blog.

This gives me a ratio (possible income / current spending level), but 100% isn’t the final target. It needs to be higher to cover income taxes, but can be lower because we won’t be supporting our sons as much. It needs to be a little higher to cover extended medical that my employer currently covers, but can be lower because we won’t have commuting costs. The biggest reason to make it higher than 100% is as a buffer against the unknown.

Good to read about and thanks for replying. I know these values will change, costs will go up, inflation, etc. This post was just scratching the surface of what I’ve started / already thought about. I think one the biggest wildcards is healthcare expenses.

I’m not too worried about car expenses. That is small compared to other ongoing costs like annual property taxes and such.

“My wife and I differ on whether we’ve already reached a safe target.” That line made me laugh because I suspect many couples might differ on that Michael!

Having retired 18 months ago my main comment is that you have huge buffers in your needs. For example in retirement the car is almost nonexistent as a need. You will find it sits in the driveway unused most of the time. I have a motorcycle and car and view them both as luxuries now. Not sure what you’d ever need 2 cars for but then I don’t need 2 vehicles either.
You will have a lot of trouble burning 200 per month on gas in retirement, the car will hardly need maintenance, and almost never need replacing, while your insurance will drop.

It is hard to spend 700 on food unless you eat out but that is not a need. Household supplies will be much lower as will clothing. Actually 200 a month is huge for clothing in retirement.

Expect your utilities to nudge up as you will be home far more.

I discovered that new hobbies and projects have added tremendously to my costs.

Good to hear from you Robert. Interesting to read your car is almost nonexistent as a need. I see it the same way for us in another 10-15 years. A think an older, used car should last us 15 years in the future. I don’t think we’ll need 2 cars although really I have no idea what the future holds.

Your comment about not needing car maintenance or much gas is aligned with my thinking.

I could see us dining out a couple times per month, so that’s why the budget for food is where it’s at. Utilities should go up as well, I’m counting on it. In a more detailed worksheet of mine I’ve counted on about 4% inflation. If it is less, that’s a nice bonus. 🙂

I agree with Robert that you have huge buffers. However, that might simply be a nice surprise for you over time and means a trip more here and there! 😉 I probably have similar numbers to yours as I want to maintain a rather high lifestyle as long as possible. Why? Just as financial planning, I’m planning to be healthy and in shape for decades! 😉 Of course, there are risks of unpredictable events that could change it all.

I think you should have an idea of costs for traveling and entertainment, based on your current spending in this matter. Many of us expect to spend more in this regard while retired, but I’ve seen it is often the contrary, mainly because they’re afraid of lacking money.

Ah, maybe I do, but I’m a conservative investor and rather boring one at that. I haven’t included any travelling or entertainment costs yet but maybe I some point we will factor that in. All I know is, right now, it’s going to be a stretch for us to retire when we want to. Our alternatives to our “retirement” date are pretty simple: spend less, save more, work longer or a combo of all three. 🙂

I agree with Robert above, seeing my parents in their retirement they hardly ever drive like they used to. It’s not even a bad thing, it’s just a choice since they don’t have to use a car to get to/from work everyday. Costs have gone down quite a bit which means their vehicles will last longer and need less maintenance along with the ‘extra goodies’ that come with a car – winter tires, wiper blades, etc.

Yeah, I mean cars can be an expense but they are certainly trumped by food costs, property taxes and home maintenance costs. Along with healthcare, I see those are the “biggies” in retirement. That means we really need to save for the next 15 years. Thanks for your comment Dan.

I base my needs on my current (and updated) monthly expenses + some k of buying power (adj with inflation) + 5500$ of saving (adj on TFSA).
I don’t have car (only rent one when I need one), wife and children. That supress any possible additional liabilities.
The total of all that make my investing goal.

“I chose DB. ”
Good choice, recently my corp. given us the choice to switch to a DC, but no thanks 🙂

Overall, it’s just an estimate. Numbers are likely a little high here, and bit low there but in the end I think the total is reasonable. The key is, time will tell if our savings can cover these expenses – I hope so.

A good friend of mine in the financial industry suggested this as a rough estimate. Take 100% of your expenses now (i’m 40 years old), add inflation for each year until retirement, and then multiply by 25. When I look at that number (~$5.3 million for my wife and I), it’s quite scary. I believe it’s quite conservative, and if achieved could provide a very comfortable retirement. I’m planning for about $4-4.5 million for my wife and I. And unlike those fortunate government workers, and probably like most other people, we don’t have a pension nor do either of our employers match/contribute to our RRSPs. There are two big unknowns that will impact what we have in retirement and how long it lasts: 1) inflation and 2) ROI

I’m sure this has been written about before, but maintaining a large difference between inflation and ROI goes a long way to maximizing your ROI and maintaining a good income in retirement. For example,at least 8% ROI when inflation is at 4%. There’s probably an ideal ratio being around 2:1 at a minimum.

I’m not an expert and not nearly as well versed as most readers of this blog. This is just what I’ve determined, though I could be wrong..

I think $4-4.5 million to retire on is huge number for retirement, that would provide one heckuva lifestyle. I have almost 100% confidence my wife and I will not be able to save and invest and earn that sum for retirement. If you’re on track to have this much for retirement, I believe you are more than set.

I am fortunate to have a pension but that could always change. It’s certainly not a “gold-plated” pension but I’m thankful nonetheless for it.

As you point out, inflation and ROI are two huge unknowns and unfortunately investors do not have any control of either.

I’m not expert by any means either, just an amateur trying to carve his own path 🙂

I went through a number of phases trying to formulate what I needed for retirement.I eventually found one I could live with.

The government has identified an in come level at which they start taking welfare (OAS) away from you after 65 (at the moment). It is the The Old Age Security pension recovery tax. Now you may wonder how that tax is relevant. It is simply this: it is the level at which the government knows very few will make noise about losing benefits – a number currently considered well above basic requirements. In other words a very comfortable income level to be at. Currently it is $71,000.

If you are anything like a normal person, that is definitely more than you need and always will be. If you can get there or even within 10,000 or 15,000 of it, you are in great shape. If you are worried about paying that tax, you are a spoiled brat 🙂

I suppose some people are not single at 65, and I haven’t looked for a number for a couple.

Your comment about tax made me laugh. If you have a tax problem in retirement, I think this is an excellent problem to have. It means you’ve saved enough!

I’ve also read many times, that earning an income in retirement just under the OAS clawback amount (starts around $71,000 give or take), is the “sweet spot” for retirement income. I only hope we can make that type of income Robert in retirement – again, a great problem to have.

There’s nothing wrong with budgetting to use the CPP to fund your extras rather than your necessities but I do think you can count on getting it. (Insofar as you can count on the anything: the banks/brokerages could also seize your investments etc. but it’s not likely or something you have to plan to avoid.) CPP is a pension plan not really a government program like OAS. Taking it away from people at 65 would be devastating to the government in power so it’s unlikely. They don’t even like to tamper too much with the OAS because of the voter backlash.

Car costs are a real wildcard. Will we even have conventional family-owned personal vehicles in the future? The good thing about budgetting for one or two is that you will have extra money if they are banned/gone by then. (Or at least that’s the hope!)

Thanks for the comment Bet. This why I like Ike’s quote, the process of planning is critical but plans unto themselves are largely irrelevant.

I’m a very risk adverse investor, so I’ve chosen to rely on my own savings and investing and not worry too much about what the government programs of the day are. If CPP and OAS are enhanced, great, if not we will take care of ourselves as much as possible.

Depending upon where my wife and I decide to live, we might not even need a car. Time will tell.

For me, I view CPP and OAS as my indexing mechanism. That amount added per year will help with inflation. I think I will take CPP early – around when I hit 63. Haven’t decided on OAS yet.

As I dip into CPP and OAS that money is less I have to take out of my savings, which are in 4 different types of investment accounts – corporate, unsheltered, TFSA and CPP. Figuring out the sequence in tapping those is a challenge.

I’ve read the “break even” date of taking CPP early is about 14-15 years after you take it. So, someone taking CPP at age 60 is taking a lower amount than someone deferring it until age 65, but because the payments started sooner for the 60-year-old, at age 74 or 75 they’ve both earned the same.

I’m a big believer in bird in the hand. I guess this is why I like dividends so much. Tangible money now that can grow to fight inflation over time.

I also don’t think the increased reduction (of CPP) is enough of a deterrent. It won’t be for me but I’ve got about 20-years to figure it out. I intend to learn from people like you 😉

We have $1.3M USD in 401Ks plus Social Security of $39K USD per year (because we worked basically our whole careers in the US) to retire in Canada with this year. Our budget is $50k/yr. We figure this will be enough. In any event, we have decided it is enough and will make do with what we have regardless. 🙂

Another issue to look at is aging and money. Having saved for a career and retired recently, I find it somewhat hard to spend, and I do not want to run out of money. What if inflation returns to double digits at some point, or indeed how can my nest-egg handle inflation now? This is a point where I struggle although logically I should not.

By simple observation, it is obvious that as one moves through the decades of one’s 60’s, 70’s, 80’s …, aging to a large degree cancels inflation with regard to money. For example, there is almost zero percent chance you will be trying expensive new hobbies in your 80’s or traveling 5 months a year all over the world – but you well may in your 60’s.

I do not think that things will change much in this regard in the future. Mortality is an incredible friend in financial planning (cheery thought of the day). I just have to convince myself!

Inflation is a huge wildcard Robert. A great friend of mine and I talk about this one quite a bit.

I would agree with you, as inflation rises and as you age, I figure you might have less variable expenses to deal with and consequently because those discretionary spending habits change you might not be affected as much in your later years vs. earlier retirement years. This is partly the reason why I gravitate to dividend paying stocks: the solution to help fight inflation is to buy the very companies that charge you more year after year.

It will be interesting to see how inflation will change over the next few decades given how low borrowing costs have been for so long. I guess it will all play out eventually!

Interesting comments on vehicles. Most of you must be city dwellers. We will always need a car. Our mail is a 22k round trip, the grandkids 600 k and mom 1000 k. It would be difficult to keep food to $700 per month as we are hostage to Overwaitea. OAS and CPP for us will be $2000+ per month in a couple of years. Much more than the couple of hundred you mentioned. Also you completely left out the boat and motorcycle expenses.

Certainly planning isn’t one size fits all! The vast majority of Canadians are urban, and more so in retirement. Since we have a cold climate if I had to list a vehicle as a necessity it would be my car not my motorcycle even though my bike clocks far more km currently. I agree your CPP numbers are more normal. Even taking it early it should be over 600.

A lot of these type of discussions seem to assume people are married. I assume that is the minority situation once people hit their 60s, given the divorce rate over 50% and some of us drop off.

Hi Mark, Great thread. I have been retired for 13 months now and I rent a 1 brdrm apartment in Victoria, BC. I’m single with 2 adult children who I’ve informed that there will be no more $$ coming from me. Paid for both of their educations & $50K for my son’s business. Now it’s my time to be selfish. I have been spending 3 months in New Zealand the past 2 winters(their summer). I bought a motorcycle down here and store it for 9 months. I have 2 MC’s in Victoria + a jeep. The jeep was purchased new in 2008 and it will probably be my last car. It has 30,000k on it as I ride my bikes most of the time but use the jeep for cross country trips to visit family.
So what are my retirement expenses?
NZ last yr – Jan to Mar (3 months) cost a total of $16,162(including $7,142 of initial expenses + $820 MC storage in NZ) + $2,691 to keep my apartment in Victoria. My Apr to Dec ( 9 months) total costs for everything in Victoria $28,794( including a 30 day road trip with my daughter to Ont to visit family). Total 2014 expenses = $47,647.
DB Pen net (3,005 x 12) = $36,060 therefore a shortfall = $11,587 made up from a RRSP withdrawal.
In 2015, I now have someone from Manitoba subletting for 3 months and the MC in NZ is paid for. So I am hopeful that my 2015 NZ expenses will be around $16,000 in total.
I am holding off applying for CPP until 65 and using my RRSP to supplement my income until then.
I was able to increase my DB Pension net to $3,221 in 2015 because I had a heavy Fed tax hit for 2013. Paid in 2014 so I increased my Inc Tx / Pen cheque last yr.
I hope my BC expenses for 2015 will be about the same as 2014 with fuel prices having gone lower & my landlord only increasing my rent by $19/month (2.44%) starting in May.
My goal is to travel while I can as long as I can then spend less in my 80s to 100. I may even give up the MCs by the time I’m 80. We’ll see. Thanks Mark.

Wish the TFSA was available when we were in the accumulation mode. I’d recommend everyone max out the tfsa then use rrsp, and drip if there are any other funds available to invest.

If one is starting out I’d drip and transfer into a tfsa when the drip gets large enough. Continue the process as one gets dollar cost averaging and no fees on small investments. Stick with large, solid companies and ones which allow drip & spp.

Are you reading my mind Henry? This is our order of priority as well. Max out TFSA, then try and max out RRSP, then kill the mortgage with lump sum payments. We DRIP everything we can, all stocks and ETFs and use the leftover cash from shares not-DRIPped to save for more indexed product purchases.

We also did exactly what you said. We had “full” DRIPs with company transfer agents then moved all full DRIPs when we had enough to run synthetic DRIPs. Never looked back!

What’s in your portfolio Henry? How many CDN stocks and US stocks? Are you still DRIPping or simply enjoying the $90 k per year in cash flow? 🙂 Ah, that must be nice! Something to aspire to!

Good for you Mark: We don’t have any etf, funds, bonds or preferreds. Why have etf’s when most of their holdings are not what one would want (at least I wouldn’t). Even those small fees will cost you thousands over time. Our portfolio is made up of 17 Cdn DG stocks and 2 US stocks. We also only have one reit. Our total investment is about 1.4Mil. We have several drips, rrif’s, tfsa and a joint acct. We only use about $25K from the rrif’s withdrawal and the rest goes into the tfsa and joint account.

You raise a good point re: the holdings that you might not want. This is the downside of ETFs – you can hold what the market holds; the good, the bad and the ugly. My money management fees for the ETFs we own aren’t very much so I will continue to own them for the diversification they provide.

I have a post about bonds so stay tuned!

We own about 25 CDN stocks, a handful of CDN REITs and about 10 US stocks. We don’t own anything that doesn’t pay a quarterly or monthly dividend.

Very smart to withdraw from RRIF and put what you don’t need inside the TFSA. But you already know that 🙂 Thanks for the insight, great to learn from folks like yourself who have been there and done that.

Just as a side note, we have our holdings (not counting ones with Transfer agents) with ShareOwners Investments. As we don’t buy or sell (rarely, if ever) we get the advantage of full drips. When we transfer from rrif’ we do an In Kind so there are no costs and they continue to reinvest the dividends.

Without any additional input our portfolio continue to grow at about 4% a year after our withdrawals.

Great insight…thanks Henry. Full DRIPs are great and it’s a big reason to where we are today, understanding the value of them as a wealth-building machine. Given your portfolio value you can certainly do what most can’t – live off your dividends without any real threat of running out of capital. Kudos to you – we hope to be there in 15 years.

Sounds like you’ll Definitely reach your goal. I owe my success to Tom Connolly. Before I started following his advice (and for a while after), I invested in what I thought were growth stocks and listened to way too many tv experts. We also got into the mind set of Taking Profits. After many years we ended up at breakeven, which is a loss.

Once I stuck to Toms advice (though I do own 2 US stocks) my income grew steadily and we were able to generate real income from our investments. Now we have a core holdings and just sit back and watch the dividend grow.

Tom is a bit of a celebrity really to dividend investing fans. I’m somewhat following his advice to buy and hold CDN banks, utilities and a few other stocks with dividend growth year after year and decade after decade. I recall the top growers in terms of longevity are CU, FTS, CWB, ACO, TRI, EMP, MRU, CNR, IMO, ENB and others.

It’s pretty amazing Henry to see your income grow (dividends) even when the stock price does not.

I’m no expert and like many found a strategy which I feel works, too late. Had I learned about Tom’s site in the 80’s or 90’s I shutter to think where we would be.

Looking back and in hind sight Diversification, at least to me, is as much a loser as Taking Profits. Had I stuck to a basic core of good dividend growth stocks I would be much better off and much happier. Even with my portfolio I’d be happy holding only 10 or less stocks and adding to those positions when the prices drop. I know my market value would be much higher than is.

Everyone has to decide what and how they feel about investing and how to best achieve their goals. Your doing a good job with your blog and I’m amazed the amount of information you provide. Good work! But for me I’m sticking to the simple, slow and easy route.

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Mark Seed is one of Canada's leading personal finance and investing bloggers. As my own DIY financial advisor we've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement.

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